FSI Brief Examines Regulatory Responses to COVID-19 Pandemic
FSI published a brief on regulatory responses, within the global financial system, to the COVID-19 pandemic. The brief takes stock of the types of financial measures that have been implemented and the rationale for implementation of these measures, along with their pros and cons. It addresses these aspects of policy response based on a simple framework and a set of principles that can guide the assessment. The brief explains that regulatory policy responses should seek to support economic activity while preserving soundness of the financial system while ensuring transparency.
Since the start of the COVID-19 crisis, prudential and related authorities have implemented a number of measures to support the supply of credit to the economy. The authors highlight that the objectives of financial policies should influence the type and extent of the adjustments. A solid and sound financial system is a prerequisite for sustainable growth. Asymmetric policies that simply ease standards in bad times but do not tighten them in good times could generate excessive risk-taking in the long run. This suggests three principles that could guide the assessment of the adjustments:
- The adjustments should be effective in supporting economic activity. This should apply at least to the crisis period, and preferably even beyond, when establishing the basis for a solid recovery.
- The adjustments should preserve the health of the banking (financial) system. Banks should remain sufficiently well-capitalized, liquid, and profitable to underpin sustainable growth.
- The adjustments should not undermine the long-run credibility of financial policies. Credibility is hard to gain and easy to lose. Compromising the policies excessively in the short run can create serious long-term damage. From this perspective, adjustments should be temporary. Transparency is key in meeting this principle.
The authors have highlighted that the recommendation for banks to make full use of capital and liquidity buffers should go hand in hand with restrictions on dividends and bonuses and clarity concerning the process for rebuilding them. Flexibility in loan classification criteria for prudential and accounting purposes should be complemented with sufficient disclosure on the criteria banks use to assess creditworthiness. The publication of detailed guidance on the application of expected loss provisioning rules, combined with sensible transitional arrangements, may constitute a balanced approach to mitigating the unintended effects of the new accounting standards.
Keywords: International, Banking, Accounting, COVID-19, Liquidity Buffer, Transparency, Disclosures, Basel III, Regulatory Capital, Expected Credit Loss, IFRS 9, FSI, BIS
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